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IRS Initiatives Could Change Compliance Landscape in 2010

During
the latter part of 2009, the IRS announced a number of new
compliance initiatives that, when fully implemented, have the
potential to dramatically alter how the IRS deals with certain
groups of taxpayers. The programs are important not only in how they
will directly affect the targeted taxpayer groups but also in the
insight they offer on the priorities of current IRS leadership for
2010 and beyond.

These
compliance programs come on the heels of the IRS’s well-publicized
voluntary disclosure program aimed at cracking down on offshore
abuses. Under this program, approximately 14,700 taxpayers came
forward to report their offshore accounts to the IRS. While
compliance initiatives such as the voluntary disclosure program for
offshore accounts are no doubt important and make splashy headlines,
the new and less-publicized programs discussed here could affect
certain taxpayers just as drastically.

IRS
Launches High-Wealth Task Force and Prepares Audits

On
Oct. 26, 2009, IRS Commissioner Douglas Shulman announced the
creation of a new specialized industry group to target high-wealth
individuals. Surprisingly, this Global High Wealth Industry Group
will be housed within the Large and Mid-Size Business (LMSB)
Division, and the IRS is planning a number of examinations to test
the program. According to Shulman, many other countries already
employ specialized task forces to pursue their wealthiest taxpayers.
The idea is to centralize IRS compliance efforts for high-wealth
individuals because the IRS has to look at sophisticated financial,
business, and investment arrangements with complicated legal
structures and tax consequences. The task force will take a unified
approach to its audits by focusing on the entire web of business
entities controlled by a wealthy individual, including issues
involving offshore structures, income sources and tax residency.

The
IRS has ostensibly been targeting high-income taxpayers all along,
but Shulman seemed to indicate in his comments that current IRS
efforts typically involve identifying single returns for audit based
on the usual scoring systems for audit selection. The new program
would instead look at everything that may be connected to a single
taxpayer, including trusts, private foundations, partnerships,
equity-sharing arrangements, royalty and licensing agreements, and
privately held and related entities where the taxpayer may have
actual or beneficial ownership. The IRS has already hired
flowthrough specialists and international examiners for the team and
is considering adding economists, appraisal experts and industry specialists.

The
IRS has not yet settled on a formal definition of high-wealth
individuals, but Shulman specifically noted that other countries
have often drawn the line at $30 million. He said the IRS will
initially focus on individuals with “tens of millions of dollars” in
assets or income.

Intensive
Employment Tax Audits

The
IRS has also announced that it will conduct intensive employment tax
audits under its National Research Program (NRP). This is a
multiyear program with random audits scheduled to begin in February
2010. The IRS has said it will audit approximately 6,000 U.S.
companies under this program (Gardner, “NRP Employment Tax Audit
Program to Examine 6,000 U.S. Companies,” BNA Daily Tax Report
G-1 (Sept. 23, 2009)). The NRP is a study and data collection
project that helps the IRS update its noncompliance estimates and
retool its computer-driven audit selection programs. Typical audits
do not yield as valuable compliance data as random audits because
the IRS, in typical audits, is intentionally targeting the taxpayers
they believe have noncompliance problems. NRP audits are random to
allow the IRS to statistically measure the total amount of
noncompliance in a specific area. The IRS then uses this data to
update its computers and estimates of the tax gap—the difference
between total taxes owed and the amount actually paid by taxpayers.

The
NRP audits are also more intense and less targeted than a typical
audit, though the IRS maintains that they are much less intrusive
than the unpopular Taxpayer Compliance Measurement Program audits
they replaced. The NRP audits allow the IRS to identify where the
compliance problems lie in a specific population and to better
target noncompliant tax returns for audit in the future.

The
goal of the employment tax audit program is to gather information in
five categories: worker classification, fringe benefits, nonfilers,
reimbursed expenses, and officer compensation. Various government
agencies have recommended that the NRP be implemented for employment
taxes to study and access the impact of worker misclassification on
the employment tax gap, which has become a high priority of the government.

The
administration has been quiet thus far on the issue of worker
classification, but President Barack Obama was a supporter of reform
efforts while in the Senate. If Congress enacts a health care reform
bill with a “pay-or-play” provision for employers, it could put even
more pressure on the worker classification rules.

Putting
Pressure on Corporate Governance

The
IRS also appears to be stepping up the dialogue with corporate
boards of directors in order to influence their behavior. In a
speech given to the National Association of Corporate Directors on
Oct. 19, 2009, Commissioner Shulman warned that the IRS is
interested in monitoring their assessment and oversight of corporate
tax risks.

Shulman
told board members that they need to be aware of aggressive tax
positions that use elaborately structured transactions or
arrangements to push tax planning beyond acceptable bounds. He
assured the audience that the IRS would not second-guess legitimate
and thoughtful business decision making by corporate leaders and
acknowledged that there will be legitimate disagreements about
identifying and quantifying the risk of various tax positions. But
he maintained that boards should have a mechanism in place to
oversee tax risk as part of the governance process. He specifically
suggested that they set a threshold confidence level for taking a
tax position and discourage or eliminate “opinion shopping” by tax
departments by allowing an independent tax firm to have direct
dialogue with the board of directors and review major tax positions.
He also stated that boards needed to address transfer pricing and
the relative profit allocated to low-tax jurisdictions to make sure
they reflect real economic contributions.

Conclusion

Over
the past few months, the IRS has provided certain insights into some
of the new initiatives that it will focus on during 2010 and beyond.
In connection with these initiatives, the IRS has been hiring and
training many new agents. Armed with this knowledge, taxpayers in
the affected groups should not be surprised if the IRS contacts them
about these issues.

Walter
Goldberg is with Grant Thornton LLP in Washington, D.C.

This
article originally appeared in the February 2010 issue ofThe Tax Adviser,
the AICPA’s monthly journal of tax planning, trends and
techniques. AICPA members can subscribe to
The Tax Adviser for a discounted price. Call 800-513-3037 or
e-mail taxsection@aicpa.org
for a subscription to the magazine or to become a member of the
Tax Section.